Nicholas Gruen had an interesting piece in The Australian on Thursday which argued that Hayek’s theory of the distribution of knowledge in society could provide a guide to better regulation. (A longer version is at Club Troppo)

Gruen tries to resolve the assymetries of knowledge between the regulator and the regulated firm by reference to Hayek’s criticism of central planning. The biggest problem facing effective regulation is managing the flow of information from firm to regulator, and Gruen sees parallels here with the failure of socialist central planners to take account of local knowledge. His solution is deeper engagement with firms to draw out some of their specialised knowledge, as well as implementing extensive trials of new regulation to see how they perform.

It is hard to how these proposals differ in practice from extending mandatory disclosure regimes, as regulators burrow further and further into the internal operations of the firm. Of course, from a regulator’s perspective, this is an appealing suggestion. But regulation is antagonistic - regulators and firms rarely pursue the same goal. Gruen’s proposals would do little to reduce the cat and mouse games which characterise contemporary regulatory negotiation.

But in coming to this argument, Gruen has misread Hayek. As he rightly points out, Hayek was concerned with local knowledge being insufficiently distributed in a planned economy. But Hayek’s resolution wasn’t simply to develop a mechanism to distribute that knowledge better – his resolution was the price system. And the price system doesn’t inform a central body about how best to manage the economy, it informs an infinitely diverse array of producers and consumers, so that the economy manages itself.

Without reference to price, Hayek’s criticism of central planning would be just a lament about the Politburo being insufficiently informed about recent rainfall in Omsk.

Gruen’s proposals may have something to recommend them from the perspective of policy implementation – although some of them would, in my view, dramatically increase the power regulators have over firms. It is not always the case that businesses and regulators work together harmoniously, and not likely that increasing the amount of consultation would change that, except to add to the risk of regulatory capture or regulatory rent seeking.

But, nevertheless, Gruen’s proposals cannot be justified by reference to Hayekian theories of information. It wasn’t just local information that Hayek was concerned with, it was, very specifically, local knowledge embedded in prices. And it is not prices that define the relationship between firm and regulator, it is legal power.